• Federal Reserve announcement drives discount rates higher, lowering pension liabilities
• Pension funded ratio jumped another 2% during the month to close at 88%, up 14% from year end 2012
• Percentage of fully funded obligations increases from 4% at year-end to 15% today
Funding levels of pension plans sponsored by S&P 1500 companies continued a strong rebound in 2013, with the aggregate deficit decreasing by $47 billion during the month of June, resulting in a $222 billion deficit as June 30, 2013, according to Mercer. The funded ratio (assets divided by liabilities) increased from 86% to 88% during June, up 14% since the end of 2012 and reached their highest level since October 2008.
The continued rise in interest rates, following Federal Reserve chairman Ben Bernanke’s comments on the potential phase out of quantitative easing, drove down pension liabilities which are discounted using high quality corporate bond rates. Discount rates for a typical pension plan rose 33 to 42 basis points during June, after having already risen 46 basis points during May. However equity markets stumbled slightly during the month with the S&P 500 index losing 1.5%, dampening the improvement slightly.
According to Mercer analysis, an estimated 15% of plan sponsors had assets in excess of their pension obligations as of June 30, 2013, compared to only 4% at December 31, 2012. Mercer also estimates that if discount rates rose another 1%, the number of sponsors with fully funded pension obligations could exceed 37%.
“All of this serves as a reminder of the volatility that pension plans are exposed to and how quickly things can change – a 14% increase in the funded ratio over just six months,” said Richard McEvoy, leader of Mercer’s Financial Strategy Group. “Rising rates have helped reduce funding liabilities and therefore we have seen funded status improve. We could easily see a large increase in fully funded plans if rates were to increase another 50 basis points from current levels. Plan sponsors should have specific goals and objectives, bearing in mind the degree of volatility they face through interest rate movements as well as in equity market returns. All these movements have been favorable over the early part of this year, but we all know that markets can decline just as rapidly, so plan sponsors should be ready to execute on their journey plan.”
Mercer estimates the aggregate funded status position of plans operated by S&P 1500 companies on a monthly basis. Figure 1 shows the estimated aggregate surplus/(deficit) position and the funded status of all plans operated by companies in the S&P 1500. The estimates are based on each company’s year end statement and by projections to May 31, 2013 in line with financial indices. This includes US domestic qualified and non-qualified plans and all non-domestic plans. The estimated aggregate value of pension plan assets of the S&P 1500 companies as of December 31, 2012, was $1.59 trillion, compared with estimated aggregate liabilities of $2.14 trillion. Allowing for changes in financial markets through June 30, 2013, changes to the S&P 1500 constituents and newly released financial disclosures, the estimated aggregate assets were $1.64 trillion, compared with the estimated aggregate liabilities of $1.86 trillion.
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